Schroders Quickview: Indian concerns remain despite good growth

Momentum is improving and we expect better performance this year compared to 2015, but reform efforts must continue.

31/05/2016

Craig Botham

Emerging Markets Economist

The first quarter of 2016 saw Indian GDP growth accelerate to 7.9% year-on-year, from 7.3% in the previous quarter, beating consensus expectations of 7.5% growth. The government’s preferred measure, GVA1, expanded 7.4% compared to 7.1% previously.

Momentum improving

The improvement is roughly in line with that seen in higher frequency data, though we still have our doubts over the level of growth. Industrial production, for example, was barely positive in Q1.

In general, the rest of the economic data looks more consistent with a 6% growth rate than one approaching 8%.

Concerns over measurement aside, momentum does seem to be improving and combined with recent legislative gains, this should provide reassurance that the economy is headed in the right direction.

With regards to legislation, the latest session of parliament has seen the passing of the Aadhar Bill (which will greatly increase the efficiency of government transfers) and the Bankruptcy Code (which addresses the ease of doing business and should also help in resolving India's bad debt problem), among others.

Again, the trend of gradual improvements continues, even if huge leaps forward are proving elusive.

Upside risks

One other risk for India, although on the upside, lies in the monsoon rains. The past two years have seen below-normal monsoons, hurting harvests and resulting in lower growth and higher inflation than would otherwise be the case.

This year, with the El Niño weather phenomenon switching to La Niña, monsoon conditions are much more favourable, and so we should see a better harvest. On the growth side, this can compensate for weaker manufacturing output.

On inflation, given that food is around 46% of the consumer price index (CPI) inflation basket, the benefits are obvious.

Overall, we expect India to deliver a better growth performance this year than in 2015, though we might quibble over the level that is actually being achieved.

The issue of measurement should not be trivialised; reform efforts should not falter on the back of complacency linked to delusions of a supercharged economy.

1. Gross added value. In 2015, India switched to using gross value added (GVA) as its preferred growth metric rather than gross domestic product (GDP). The difference between the two is that GDP includes the net taxation position (taxes less subsidies), while GVA does not.↩

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